The housing market is throwing out mixed signals. The Federal Housing Finance Agency (FHFA) came out this year with a REO-to-rental type program. The initial program was aimed at a small pool of 2,500 properties in eight distressed states targeting shadow inventory. Wait. I thought shadow inventory was no longer a problem? So why is the government actively soliciting bids from large investors, many connected to the same large banks that set the foundation for this financial crisis, in a market where active inventory is incredibly low? This is part of the core mission of the modern day real estate feudal system where even small investors are locked out of the market or pushed to gamble if they want to compete. There is no shortage of investors looking to buy property today with their own money. Just look at the hipster mania here in California. So why try to devise these complicated programs where rents will be securitized for easy selling to Wall Street? If this sounds familiar a similar thing occurred with MBS and even the more toxic CDOs.

REO-to-rental

Contrary to what is being said there is still a good amount of distressed inventory out there:

Source: S&P

This is an interesting way of looking at shadow inventory based on total original loan balance. As of the end of Q1 of 2012 there was over $300 billion in shadow inventory property. This of course is based on conservative estimates since there are many more places 30+ days late. You can see from the chart above that it would take a good amount of time to clear this inventory. Yet the market this year has been moving up steadily in price. Thanks to low inventory and the Fed’s massive intervention in lowering interest rates. So why in the world would the government create a shadow market simply to off load these properties to investors with big enough pockets? How well do you think a big bank is going to manage thousands of properties across the country?

It is understandable why this is occurring since Wall Street, the Fed, and banks essentially realize that the government is not going to do anything to stop their massive speculation. The Fed is basically free to do whatever it likes without oversight from our government. In the current market of low yield, this is what they are looking at:

The median asking sales price of a home is now ticking back up but rents are heading to record highs. Why? This is occurring for a variety of reasons:

-1. Bursting of housing bubble pushed multi-family CRE building to new lows

-2. Many are simply unable to buy even in this environment and rental properties are in limited supply

-3. The millions that lost homes through foreclosures ended up as renters

-4. Steady growth of the population

Do not mistake the rise in rents with a rise in household income. What we have occurring is that Americans are seeing their disposable income shrink and more of it going to housing. The rise in rents has caused Wall Street to contemplate the idea of being a landlord. Yet the big mistake with REO-to-rental securitization is the notion that pass-through rates are going to be steady. There is no market history for this here aside from individual landlords and property managers. Yet experience here just like in life can vary greatly.

In the past prior to the 2000s, mortgages were fairly safe bets. Investors could feel safe knowing they would get their money back either through steady payments, refinances, or ultimately a sale. The mortgage market used to be very stable. Yet with rentals you have the following:

-1. Repairs (each time a new tenant comes in, there is undoubtedly repairs)

-2. Vacancies – by definition many are only in a home for a short duration

-3. Property management costs – don’t think that many of these bankers are going to get their hands dirty with the day-to-day management of the home

The rental market is very different here but rising rents are definitely getting the attention of big money. Typically big money flowed into multi-family properties like apartments or condos where economies of scale made it more effective to manage. To manage individual single-family homes is probably something best left to local investors that best understand their local market or those willing to put their own money on the table. Why block out the market to only big banks/big money here?

The REO-to-rental idea

The securitization idea is definitely getting some attention:

This is an interesting breakdown. Who gets the tax benefits here? How do you breakdown maintenance. Who really owns the property here? The idea gets muddied because future rental payments are volatile. Also, are projections going to be for 30 years? Think of a place like Detroit or Cleveland where the rental market collapsed over the years. Those thinking they can see deep into the future especially with our baby boomer population retiring are going to have to take some wild bets.

Another driving force is that yes, we do have more renters out in the market today:

Nearly 40,000,000 households are renters. The homeownership rate has fallen from 69 percent at the peak back down to nearly 65 percent. These massive intervention programs like the FHA, FHFA REO-to-rental, and FED QE3 are causing bubble like behavior in places like California once again. You hear all this noise that shadow inventory doesn’t exist then you have this FHFA program specifically designed to reduce shadow inventory by selling properties to big money.

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“Wall Street Landlords – REO-to-rental program designed to reduce shadow inventory by selling to big money investors. Yet the market is hungry for real estate inventory so why is the government helping banks again?”

And the housing game just continues for big financial companies. PRIVATIZE PROFITS an SOCIALIZE LOSSES. The saddest thing, is the government (Politicians and Federal Reserve) allows this charade to continue at the expense of 95% of the population. NOTHING has changed, for the crooks who almost bankrupted the world financial economies. It has just gotten worse, with accounting tricks, more derivatives and increasing financial leverage. There is no housing market left. Only a spin on the wheel of the housing game with ever increasing odds of failure. It’s now rigged just like the stock market. Those that think this type of artifical market can stand the test of time, will be in for a rude awakening as all the money printing in the world has not helped 95% of the population one bit. It is a desperate move for a desperate system that has no other choices. The pool of players in this game is shrinking as an increasing amount of the population becomes more reliant on governement assistance. Instead of trying to realy solve the problem, the government just makes the problem bigger by piling on more debt. Eventually this game fails, as it has throughout recorded history.

They want people fighting over crumbs (limited inventory) or try releasing blocks of inventory to investment groups (just like packaging MBS), so prices appear to be rising and “apparent” flippers (investment groups) create another bubble. Throw in FHA unqualified buyers and the recipe is the same. Wash, rinse and repeat. Don’t take the bait. It will be interesting to see what happens after the election and as we head toward the fiscal cliff. The stock market is already showing signs of nervousness as the worldwide recession strats to take affect. In reality, Obama, Romney, Clinton or Bush don’t make that much difference.

However there are still some impressive short sales occurring on The Westside in All neighborhoods, IF you can get your hands on them.

Since the equity stripping ponzi scheme used to steal the equity from the home buyer the day we closed escrow was never prosecuted the only way out for the banksters is to keep the homes on their books at the bubble prices they used when they pre sold the pools of MBS, with this plan they simply substitute a renter in place of the original borrower and voila all is right in Banksters kingdom. Americans will be scewed yet again and most will be ignorant that they are even being robbed. Banksters know most people would rather hang themselves than learn anything especially about finances ironically. Such a Wagner.

A sixth grader could look at the last graph and deduce that the home ownership mean is 64%. Was there no concern at the Fed when it went straight up to 69%? Of course not, because they and their buddies were cashing in with both hands. Regression to the mean is a real bitch.

The housing circus aside, the real problem is the need to raise taxes and cut spending at the same time we are in a deflationary death spiral. Back to my sixth grader, final exam question, What are the prospects for growth under this scenario?

It really is scandalous when these funds acquire off market and with FHFA structured financing. Each of whom expect to gain from shared equity and appreciation. The Govt keeps reporting that these sales are made “at or above market value”. In other words they have found a way to sell in Bulk without taking losses. The Govt thinks this helps, but I wonder what a cross analysis of the impact of not having those homes circulate through normal channels has on the economy.

and that’s if it goes into an end buyers hands. If it goes to a “flipper” then:
12. City gets building permit fees.
13. Home Depot gets business.
14. Another Buyer & Seller Realotr team get business and all of the items above get more money through a second transaction.
15. Local contractor or “workers” make money.

and on the list goes. Taking these homes out of circulation decreases economic activity.

Bankers got near zero percent money from the Fed. Wall Street sounded like a bunch of seals eating a fresh bucket of fish. The lenders mortgage brokers got spanked. Everyone who had a piece of the pie was to blame for this debacle.

The only group who skated through this mess was the REALTORS. In fact as housing prices were in the free fall commercials would say. Its an excellent time to buy. Rates are low and so are prices. Too bad you were underwater on closing day.

Still too many underwater borrowers just hanging on. NOD rate on modified loans is higher then 50%

Btw when are the stated income wage earn loans coming back? No employment, income or reserve verification?

This is the 5th boom bust cycle I have personally been through and I am sure I will see a few more.

‘Btw when are the stated income wage earn loans coming back? No employment, income or reserve verification?’

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When I did a Greenlight refi, months ago, I had to sign a form that said it was a federal crime to misrepresent your income on the refi paperwork. I don’t know if that’s universal though, because BofA sold my loan to Freddie Mac years ago.

Homeowners represent the majority of households (i.e., votes) and the vast majority of wealth (i.e. voting buying power) in our country. Is it any surprise that this most powerful constituency in America will swallow any policy, rule or law that ends up supporting the value of their biggest asset…their home?

The way I plan to “win” is staying put in my $1,500/month rental (2/1 SFR in Torrance) and invest my preferential cash-flow position. Fortunately, the owner just refi’d, so I don’t have the deadbeat landlord situation many have suffered with on the board.

I’ll only buy when the price tag is right; I don’t give a rip about rental parity.

Whether prices come to me or not, I’ll be putting my money to work with low-PE, high-dividend stocks, dollar-cost averaging as I go.

Those who gamble in buying in partial or under gentrified neighborhoods are at the biggest risk in this reflating period (thinking Lawndale, Lomita, Hawthorne, etc. in the South Bay). With no move-up market, the risk is you’re the last sucker on a flip.

I know many are losing heart, but this shell game is winding down. Even with what is looking to be a Japan like proud of life interest rates prove have nowhere to go but down. Home builders are reading up again and let’s not forget the RE industry need volume to prosper. Once inventory rises, which is inevitable, prices will adjust. Ninja loans are a thing of the past. And the is a whole new group of specuvestors who are going to get burned in the next year or so. We are going to return to a historical inventory average at some point. From there people will be buying homes with verifiable incomes on30 year fixed mortgages. Prices well reflect people earnings. Many of is have been waiting for the better part of a decade during this stupidity. What’s two more years or so?

Charles, I’m not sure how long this game can continue but the Fed will likely outlast everybody who has been patiently waiting. From reading your paragraph, you want more inventory and higher rates; thus, lower home prices. This is the exact opposite of what the Fed and PTB want. I personally can’t see rates coming up much (if it all) for years to come. Let’s just say rates were allowed to hit 6% in 2 or 3 years, this would put most buyers from 2009 to the present underwater. Do you really think this will happen after seeing all the nonsense we have witnessed to “save” housing. I personally don’t.

You mentioned two more years or so. What if that two years turns into five or seven years? Are you prepared to wait that long? Most people are not and they just want to get on with their lives. If you can buy a place today at or below rental parity, it might be time to get off the fence.

I don’t think rates will hit 6% anytime soon. But remember the problem now is more inventory than rates. Rates will probably creep back to 4-4.5% but more importantly as the amateur flippers get burned and families continue to lose purchasing power where will prices have to go but down? Low rates alone couldn’t stop Japan’s deflationary death spiral. The fact that the FED has been so vociferous speaks of their desperation. Communism fails everytime. The FED’s “Centrally Planned Real Estate Economy” will fail as well. It’s a self feeding downward spiral. If all the money on the sidelines floods back into rentals, where’s the capital to fund the REAL economy??? And unless the real economy recovers were back in the credit binge cycle that got us here in the first place sans the NINJA loans that made the bubble so monstrous. Investors want returns and renting Single Family homes ain’t the best way to turn a profit. Once this dead cat bounce of flippers runs through the system we will continue our downward trajectory on prices. I’m not saying the drop will be exponential, but There’s another 15% coming off the top of these prices at minimum.

Charles, there are many areas in So CA such as the Inland Empire, where home prices are fairly much in-line with incomes. Same is true for outlying areas in No CA. The desirable neighborhoods in Los Angeles (particularly the Westside) were expensive 30 years ago (when measured to income) and absent a meltdown in the So CA economy, will be expensive 20 years from now.
There are many high income individuals from all over the US and the world that want to live in those neighborhoods. There is also a substantial amount of inter-generational bequeathing of homes. It seems that many of the readers/posters on the Dr’s blog have decided that prices in the better areas will not have much more downside and have made the plunge to purchase houses. Their patience of the last 6 years has been rewarded with significant price discounts from the peak. Those individuals waiting for prices to drop to the 3x-4x income category may be better off to re-evaluate their econimic options and life-style. There are many areas in CA and the US that offer decent employment opportunities, affordable housing, and a good quality of life. The only caveat is you may need to purchase a winter jacket.

” It seems that many of the readers/posters on the Dr’s blog have decided that prices in the better areas will not have much more downside and have made the plunge to purchase houses. ”

If they are going to live in these places a while it might not be a bad decision. However if we are talking half a million dollar homes a 15% drop is $75K. Given mortgage rates are being kept this low by extraordinary measures that cannot be sustained long term, a rise to 4.5% or so would require a significant price reduction for payment parity. Givwen that I think a %10 drop from current prices is a pretty rosy scenario. It could be more. Given that, further patience should pay off. We’ve waited this long, why not see what things are like in 2014? Unless you REALLY love a place you find at least let the election and its aftermath play out.

The thing is the Los Angeles area doesn’t really offer a good quality of life. Not for anyone who works for a living, for the independently wealthy maybe. The commute situation is horrible and the unemployment high, the public services are extremely poor and the taxes high. The weather is good 12 months a year at the beaches, it’s only really good 9 months or so inland, and it’s getting much much hotter recently with climate change. I can forsee it becoming even worse for everywhere but the beaches.

I thought I’d post a comment because my wife is tired of hearing me whine.

I marvel at how fast homes are getting sapped up in the South Bay. I looked at a short sale in Redondo that had been on the market for 4 days and already had multiple offers.

According to the experts I’m supposed to save $16k a year into my 401k, max out my Roth at $6k a year, save for my child’s 529 plan, and continue to save for a 20% down payment (which in So. Cal is well over $100k). All awhile paying exorbitant rents, rising utility, food, daycare, and gas prices.

How are people affording to buy and live comfortably. I can’t help to think I’m doing something wrong. Trying hard not to feel sorry for myself, but I’m one of many who pout and ask “when is it my turn.”

Would love to hear any/ all feedback. (Even if it’s to tell me to stop my whining)

Let me help un-confuse the two of you.
The “Experts” told you to put 16% into Wall Street another $6k into Wall Street, put your kids college money into Wall Street and rent out 20% of your money to Wall Street.”

Do you see where the “experts” are leading you to slaughter now? It’s their gameboard and their jacks. Play accordingly.

Two words: Unbelievable debt. Literally everyone I know here thinks of debt like a 5 year old would (a never ending bucket of money that doesn’t have to be repaid.) Most people in Southern California ARE struggling and LIE about it. It’s easier to not admit you’re in debt up to your eyeballs. The people who are comfortable most likely have family here to stay with, inherited houses, have been here for decades, have an “in” to a good job, or are rich.

My best advice would be to remind yourself that what’s going on here is NOT affordable and don’t give in to people who seem annoyed when you question it.

Riddle me this, it is very frustrating trying to break into this market. However, you are targeting the South Bay (Redondo) which is higly desirable for many reasons…location, climate, safety, schools, close to job centers, etc. You will likely fight many other parties for anything priced accordingly under 600K. Redondo is generally not a first time buyer, starter area. You are probably competing with people who have equity from a previous sale, two good incomes, well off parents, etc. While it is definitely advisable to have 20% down, many people are buying with less. The big question for you is it worth waiting to save for a larger down payment. Also, if saving the down payment is the highest priority righ tnow, you might want to lighten up on the retirement savings for a short term. Good luck with whatever you do.

I used to be in your exact position but then I stopped feeling sorry for myself and bought a huge home and property in Murrieta for less than $300k. The monthly mortgage could be covered with two minimum wage jobs in a worst case scenario. A bus to downtown San Diego is about 1 hour 40 minutes and costs $170 monthly. I spend that time working on my laptop or catching up on tv shows or sleeping. It’s a sacrifice but wife gets to stay home with the kids, the city is safe (#2 safest in the country for 3 years in a row), school system is good. If you don’t have kids, just buy a condo in Irvine or S.D. 0-1 bdroom condos are on the super cheap there.

Please remember that their have been several upturns in the market since it went bust in 2007.
Back in 2009 we were in a similar market with little inventory and rapidly rising prices.

You’ll just have to wait until inventory starts to build again, and it will. Bankers control the inventory, but they have to release it from time to time before the pressure becomes to high.

Back in 2009-2010 the government and banks virtually shut off the foreclosures, we started hearing about “home owners” living in properties two years before being foreclosed on. No normal person could figure this out or even believe what was happening. Then in mid 2010 the inventory started to rise again, and saw large price drops through the end of 2011.
Riddle we are in a similar market with lack of inventory.
You’ll just have to wait until they let out the inventory again. It’s coming, but you’ll just have to wait for their schedule.

Our landlady just raised our rent to $1500/month for a 2bed/2bath townhouse in Bellflower, and an extra $50-$100 for the “privilege” of parking in our own parking space outside of our garage! The quality of it is bad and they are so cheap that they didn’t even paint the walls when we moved in 2 years ago. It’s literally just drywall. When we were looking at new apartments, it was definitely harder to find something for less than $1400. The amount of people who don’t even do upkeep on their rotting complexes is ridiculous. Here’s to hoping this crap doesn’t last another decade….

If you really want to see how much the Fed has distorted the real estate market see below.

A $600,000 house drops in value to $500,000, roughly 20%. The mortgage payment at 3% drops from $2,500 to $2,100, only $400 dollars a month. Yet the seller is out an immediate $100,000. The average family cannot live under this kind of leverage with a 3.5% down payment. Banks and hedge funds can. In short, you have to be crazy to live in California and pay this much for housing. Highly leveraged, costly real estate is only advantageous for the financial sector. It literally kills the borrower, home owner.

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